Moving away from easy money

In its latest review of the monetary policy, the Reserve Bank of India has tried to balance the often conflicting objectives of supporting growth and simultaneously reining in inflation against the backdrop of a fast changing environment. While the economy is seen moving into a higher growth trajectory, inflation has become a major policy concern. Besides, in any case, it was expected that the RBI would announce the first decisive steps to reverse the easy money stance adopted since September 2008. At the global level, the outlook for most countries is improving. Compared to a year ago, a different set of policy challenges has emerged for both the advanced and the emerging economies. In 2009, India and other emerging economies were engaged in mitigating the impact of the global financial crisis on their real economies. In 2010, their endeavour would be to strengthen the recovery process without compromising on price stability and to contain asset price inflation caused by large capital inflows. Both domestic and global factors have influenced the RBI’s decision to announce a sharp hike in the CRR by 0.75 percentage point — to 5.75 per cent — to absorb approximately Rs.36,000 crore in two stages.

The higher-than-expected increase in the CRR need not lead to higher commercial interest rates immediately. The policy interest rates, namely the repo and the reverse repo rates, have been left unchanged. Moreover, there will be sufficient liquidity even after the CRR hike takes effect. Almost 98 per cent of the government borrowing programme has been completed. The anticipated increase in credit demand during the rest of the year can be easily taken care of with the available funds. The RBI has lowered its projection of credit growth to 16 per cent and that of deposit growth to 17 per cent. The economy that has rebounded strongly with a 7.9 per cent growth in the second quarter is expected to maintain its momentum during the rest of the year. The RBI’s revised forecast of 7.5 per cent is sharply higher than the six per cent it had projected earlier. Inflation, though still caused predominantly by supply side factors, is a major threat to growth. The RBI has raised its projection for WPI inflation for end-March to 8.5 per cent. There are factors that might lower growth and accentuate inflation. Uncertainty about the pace and shape of global recovery, surge in oil prices in the wake of a sharp recovery, increase in capital inflows beyond the absorptive capacity of the economy, and performance of the South-West monsoon in 2010 are some of the imponderables.

While all the people of the country are not immediate beneficiaries of economic growth, the soaring prices of essential items of mass consumption affect everyone, with those who have not yet benefitted from economic growth being affected the most.Yet the very serious problem of continuously rising prices does not seem to get as much attention in the government circles and the editorial rooms of the media as the prospects of GDP growth get. The high liquidity and the consequent easy availabilty of cheap money to all actors in the economic system which was engineered by the government and assisted by huge foreign fund inflows has at last been recognised, at least by the RBI, as a major cause of rising prices which has affected the entire population. Any change for the better, such as economic growth, can be sustainable only if it is calibrated in such a way as to create the least disturbance in any part of the environment. Such understanding does not seem to have sunk into the minds of the ideologues of the ruling dispensation.